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13.8 Cases and Problems

Learning on the Web (AACSB)

How Much Should You Reveal in Playboy?

What can you do if you’re sitting around your dorm room with nothing else to do (or at least nothing else you want to do)? How about starting a business? It worked for Michael Dell, who found assembling and selling computers more rewarding than attending classes at the University of Texas. It also worked for two Stanford graduate students, Sergey Brin and Larry Page. They came up with a novel (though fairly simple) idea for a search engine that ranked Web sites according to number of hits and online linkages. Because their goal was to organize massive amounts of electronic data, they wanted a name that connoted seemingly infinite volumes of information. They liked the word “googol” (a child’s coinage for a very big number—1 followed by a hundred zeros), but, unfortunately, someone already owned the domain name “Googol.” So Brin and Page did a little letter juggling and settled (as we all know by now) for “Google.”

By 2004, the company that they’d started in 1998 was the number-one search engine in the world. Their next step, like that of so many successful entrepreneurs before them, was to go public, and that’s where our exercise starts. To learn more about this episode in the epic story of Google—and to find out what role Playboy magazine plays in it—read the article, “Google Sets $2.7 Billion IPO” (http://money.cnn.com/2004/04/29/technology/google), read Google’s Playboy interview (http://www.google-watch.org/playboy.html), and read the BusinessWeek article, “Google Dodges a Bullet” (http://www.businessweek.com/technology/content/jan2005/tc20050114_0781_tc119.htm).

When you’ve finished reading the articles, answer the following questions:

  1. What’s an IPO? Why did Brin and Page take their company public? What disadvantages did they incur by going public? Are they likely to lose control of their company?
  2. How does a Playboy interview enter into the Google story? What did Brin and Page do wrong? (By the way, the interview appeared in the August 2004 issue of Playboy; because Google incorporated the text into its revised IPO filing, it’s now in the public domain and available online.)

  3. Did the Google founders get off the hook? Was the punishment (or lack of it) appropriate? Quitting school to run Google paid off big for Brin and Page. Their combined net worth as a result of the IPO suddenly skyrocketed to $8 billion. But how about you? Could you have gotten rich if you’d jumped on the Google bandwagon just as it started to roll? Could you at least have earned enough to pay another year’s tuition? To respond to these questions, you need to know two things: (1) the IPO price of Google stock—$85—and (2) Google’s current stock price. To find the current price, go to http://finance.yahoo.com to link to the finance section of the Yahoo.com Web site. Enter Google’s stock symbol—GOOG—and click “Go.” When you find the current stock price, answer the following questions:

    1. If you’d bought Google stock on the IPO date and sold it today, how many shares of Google would you have had to buy in order to make enough to cover this year’s tuition?
    2. If you owned Google stock today, would you sell it or hold it? Explain your answer.

Career Opportunities

Financial Futures

One advantage of a finance major is that it prepares you for a wide range of careers. Some graduates head for Wall Street to make big bucks in investment banking. Others prefer the security of working in the corporate finance department of a large firm, while still others combine finance and selling in fields such as insurance or real estate. If you like working with other people’s finances, you might end up in commercial banking or financial planning. To better acquaint yourself with the range of available finance careers, go to http://www.careers-in-finance.com/ to link to the Careers in Finance Web site. After reviewing the descriptions of each career option, select two areas that you find particularly interesting and two that you find unattractive. For each of your four selections, answer the following questions:

  1. Why do you find a given area interesting (or unattractive)?
  2. What experience and expertise are entailed by a career in a given area?

Ethics Angle (AACSB)

The Inside Story

You’re the founder and CEO of a publicly traded biotech firm that recently came up with a promising cancer drug. Right now, life on Wall Street is good: investors are high on your company, and your stock price is rising. On top of everything else, your personal wealth is burgeoning because you own a lot of stock in the company. You’re simply waiting to hear from the FDA, which is expected to approve the product. But when the call comes, the news is bad: the FDA has decided to delay approval because of insufficient data on the drug’s effectiveness. You know that when investors hear the news, the company’s stock price will plummet. The family and friends that you encouraged to buy into your company will lose money, and you’ll take a major hit.

Quickly, you place an order to sell about $5 million worth of your own stock. Then you start making phone calls. You tell your daughter to dump her stock, and you advise your friends to do the same thing. When you tell your stockbroker the news, he gets on the phone and gives a heads-up to his other clients. Unfortunately, he can’t reach one client (who happens to be a good friend of yours), so he instructs his assistant to contact her and tell her what’s happened. As a result, the client places an order to sell four thousand shares of stock at a market value of $225,000.

Let’s pause at this point to answer a few questions:

  1. Are you being a nice guy or doing something illegal?
  2. Is your stockbroker doing something illegal?
  3. Is the assistant doing something illegal or merely following orders?
  4. Is the stockbroker’s client acting illegally?

Fast-forward a few months. Federal investigators are interested in the sale of your stock and the sale of your daughter’s stock. Because all signs point to the truth as being an invitation to trouble, you lie. When they talked with your friend about her sale, say investigators, she explained a standing agreement that instructed her broker to sell the stock when the market price went below a specified level. It sounds like a good explanation, so you go along with it.

Now, answer this question.

  1. What have you done wrong? What has your client friend done wrong?

The Reality Version of the Story

At this point, let’s stop protecting the not-so-innocent and name some names. The biotech company is ImClone, and its founder and CEO is Dr. Samuel Waksal. The Merrill Lynch broker is named Peter Bacanovic and his assistant Douglas Faneuil. The client friend who dumped her stock is Martha Stewart.

Let’s focus on Stewart, who is the founder of Martha Stewart Living Omnimedia, a prosperous lifestyle empire. Her actions and their consequences are detailed in an article titled “Martha’s Fall,” which you can access by going to http://www.newsweek.com/id/53363 and linking to the MSNBC Web site. Read the article and then answer the following questions:

  1. Do you believe Stewart’s story that she sold the stock because of a preexisting sell order and not because she learned that the cancer drug wouldn’t be approved? What did she do that was illegal? What was she actually convicted of doing?
  2. Waksal got seven years in prison for insider trading (and a few other illegal schemes). Bacanovic (Stewart’s broker) got five months in jail and five months of home confinement for lying and obstructing the investigation into the sale of ImClone stock. In return for helping the prosecutors convict Stewart, Faneuil (the broker’s assistant) got a federal “get-out-of-jail” card but was fined $2,000 for accepting a payoff (namely, an extra week of vacation and a bump in his commission) to stonewall investigators. Stewart went to prison for five months and spent another five under house arrest. Was her punishment too lenient? Too harsh? If you’d been the judge, what sentence would you have given her?
  3. How could Stewart have avoided prison? Did her celebrity status or reputation help or hurt her? Did she, as some people claim, become a poster CEO for corporate wrongdoing?
  4. Why are government agencies, such as the SEC, concerned about insider trading? Who’s hurt by it? Who’s helped by government enforcement of insider-trading laws?

Team-Building Skills (AACSB)

Looking for a High-Flying Stock

Congratulations! Your team has just been awarded $100,000 in hypothetical capital. There is, however, a catch: you have to spend the money on airline stocks. Rather than fly by the seat of your pants, you’ll want to research a number of stocks. To familiarize yourself with the airline industry, go to http://www.airlines.org/Economics/ReviewOutlook/Pages/2010AirlineIndustryEconomic.aspx to link to and read the article: “2010 Airline Industry Economic Perspective.”

Each team member is responsible for researching and writing a brief report on a different company. Don’t duplicate your research. Be sure to include low-cost airlines as well as larger carriers. To cover the industry, pick airlines from the following list. The URLs bring you to each airline’s information page on Yahoo! Finance. If any of the links listed below do not work, you can get to that airline’s page by doing the following: Go to http://beta.finance.yahoo.com/; under “Investing” on the top bar, select “Industries” from the drop-down list. Then click on “Complete Industry List” on left sidebar. Under “Services” click on “Major Airlines” and then “Company Index” to find the first four airlines listed below (AMR/American, Delta, U.S. Airways, and Spirit); click on “Regional Airlines” to find the remaining two airlines (Jet Blue and Southwest).

Each member should prepare a report detailing the following information about his or her chosen company:

  • A description of the airline
  • The percentage change in revenue over the last fiscal year
  • The percentage change in net income over the last fiscal year
  • A chart comparing the movement in the company’s stock price over the past year with the movement of the DJIA
  • Current earnings per share (EPS): net income divided by number of common shareholders
  • Current PE ratio
  • Current stock price

Here are some hints for finding this information on the Yahoo! page devoted to a given company:

  • The company will be described in a “Company Profile” appearing toward the top of the page.
  • You can get the remaining information by going to the bottom of the page and clicking on the following:
  • “Financials” for changes in revenues and net income
  • “Chart” for trends in stock prices
  • “Quote” for EPS, PE ratio, and current stock price
  • When reviewing financial statements to calculate percentage changes in revenues and net income, be sure you click on “Annual Data” to get information for the entire year rather than for just the quarter.

Team Report

Once each member has researched one airline, the team should get together and decide how to invest its $100,000. Announce your decision in a final report that includes the following items:

  1. An overall description and assessment of the airline industry, including a report on opportunities, threats, and future outlook
  2. A decision on how you’ll invest your $100,000, including the names of the stock or stocks that you plan to purchase, current market prices, and numbers of shares
  3. An explanation of the team’s investment decision
  4. Individual member reports on each researched company

Follow-Up

A few weeks later, you might want to check on the stock prices of your picks to see how you’d have done if you’d actually invested $100,000.

The Global View (AACSB)

Where’s the Energy in the Chinese Stock Market?

Warren Buffett is the third-richest man in the world (behind Bill Gates). As CEO of Berkshire Hathaway, a holding company with large stakes in a broad portfolio of investments, Buffett spends a lot of his time looking for companies with promising futures. His time has been quite well spent: the market price of a share in Berkshire Hathaway now tops $115,000—up from $16 a share in 1964.

In 2002 and 2003, Berkshire Hathaway paid $488 million for two million shares in PetroChina, an energy firm 90 percent owned by the Chinese government. In 2007, he sold the stock for $4 billion, realizing an incredible more than 700 percent gain. To evaluate Buffett’s thinking in buying and then selling stock in PetroChina, you’ll need to do some research.

First, find out something about the company by going to http://www.petrochina.com.cn/ptr and linking to the English version of the PetroChina Web site. Explore the sections “About PetroChina” and “Investor Relations.” Look for answers to the following questions:

  1. What does the company do? What products and services does it provide? How does it distribute its products?
  2. On which stock exchanges are its shares sold?

Next, to learn about the company’s financial performance, go to http://finance.yahoo.com to link to the Finance section of the Yahoo.com Web site. Enter the company’s stock symbol—PTR—and review the information provided on the site. To see what analysts think of the stock, for example, click on “Analyst Opinion.” To gain insight into why Buffett sold his stock and whether it was a good or a bad move, read these articles: “Should We Buy the PetroChina Stock Warren Buffett Sold?” (http://www.peridotcapitalist.com/2008/03/should-we-buy-petrochina-stock-warren.html) and “Buffett's PetroChina Sale: Fiscal or Social Move,” (http://investorsagainstgenocide.net/page1001126)

Now, answer the following questions:

  1. What do analysts think of the stock?
  2. Should Buffett have bought the stock in PetroChina? Was it a good decision at the time? Why or why not?
  3. Should Buffett have sold his stock in the company? Why do you think he sold the stock? Was it a good decision at the time? Why or why not?
  4. If you personally had $50,000 to invest, how likely is it that you’d buy stock in PetroChina? What factors would you consider in making your decision?

To learn more about the pros and cons of buying stock in Chinese companies, go to http://www.newsweek.com/id/54174 to link to the MSNBC Web site and read the article “Nice Place to Visit.” Then answer these final questions:

  1. What are the advantages of investing in the stock of Chinese companies? What are the disadvantages?
  2. In your opinion, should the average investor put money in Chinese stock? Why, or why not?